Working Paper: NBER ID: w9959
Authors: Hanno Lustig; Stijn Van Nieuwerburgh
Abstract: In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. Using aggregate data for the US, we find that a decrease in the ratio of housing wealth to human wealth predicts higher returns on stocks. Conditional on this ratio, the covariance of returns with aggregate risk factors explains eighty percent of the cross-sectional variation in annual size and book-to-market portfolio returns. A data appendix for this paper is available.
Keywords: Housing Collateral; Consumption Growth; Risk Premia; Asset Pricing
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decrease in housing collateral ratio (R31) | increase in conditional market price of risk (G19) |
| decrease in housing collateral ratio (R31) | increase in exposure to idiosyncratic risk (G19) |
| covariance of returns with consumption growth shocks (F62) | discount on assets when collateral ratio is low (G32) |
| housing collateral ratio (G21) | predicts aggregate stock returns (G17) |
| low collateral availability (G33) | higher risk premium for value stocks compared to growth stocks (G11) |